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Posts published by Phillip Swagel

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

In the current housing financing system, shareholders and management of Fannie Mae and Freddie Mac got the considerable profits in good times, and when the housing market collapsed, taxpayers were stuck with the bill — a $190 billion tab in the recent crisis.

A Senate proposal for a new system would have private investors rather than taxpayers take on most of the risks and returns involved with mortgage lending — if a misguided obsession with the small additional cost to borrowers doesn’t sink the reforms.

The proposal put forward recently by Senators Tim Johnson, Democrat from South Dakota, and Michael Crapo, Republican from Idaho, who lead the Senate banking committee, would bring about a housing finance system driven first and foremost by market incentives rather than by government dictates. There are many pieces to the proposal, including support for affordable housing and an innovative approach by which to reward financial firms that serve a broad range of customers and penalize those that do not.

But reducing the government involvement in housing finance and bringing back private capital is at the heart of the bill, which would end the anomalous situation in which the housing finance giants Fannie Mae and Freddie Mac are private companies that earn enormous profits but remain under the control of a government regulator.

Building on an earlier effort by Senators Bob Corker, Republican from Tennessee, and Mark R. Warner, Democrat from Virginia, the Crapo-Johnson legislation reduces taxpayer exposure to housing risk by requiring private investors to risk their own capital in an amount equal to 10 percent of the value of the mortgages receiving a government guarantee. The government would then sell secondary insurance on mortgage-backed securities composed of qualifying home loans (with underwriting protections written into the legislation). As mortgages go bad (which they do even in good times), the private capital would take the first losses and provide a buffer against the need for the government to put out cash on its guarantee. Read more…

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

As I noted in my post last Wednesday, Social Security is inherently a hot button topic. It struck me in looking through the comments that the topic perhaps was so sensitive that my point was missed in some readers’ reaction to a discussion of changes to Social Security benefits. I thought it would be worthwhile to elaborate.

Several commenters wondered why I do not consider as a policy option increasing the cap on Social Security wages that are subject to tax.

The answer is that changes to the wage cap are among the list of possible tax changes one could make to shore up the financial condition of Social Security.

Under current Social Security rules, wages are subject to a 12.4 percent tax up to a cap, currently set at $117,000 a year. Wages above this level are not subject to Social Security taxes and do not result in the accrual of additional of benefits. The wage cap applies only to Social Security; all wages are subject to the Medicare tax, plus an additional tax levied in the Affordable Care Act above $200,000.

Raising the Social Security wage cap would be a reform of Social Security that improves the financial condition of the system through a progressive increase in taxes. The change could be made with or without accrual of additional benefits corresponding to the tax paid on wages above the existing cap.

There are two main policy levers available for Social Security reform: revenues and benefits (Andrew Biggs in his article linked in my original post discusses changes to work incentives as well). In writing that raising taxes is one of the two options, this encompasses every variety of tax increase, including higher tax rates and a higher wage cap. Raising the cap is an increase in taxes from current law. President Obama’s now-discarded proposal last year to change the way in which benefit growth is calculated is a reduction in future benefits from what is now promised under current law. That is a change in benefits.

With this in mind, let me reaffirm what I have written: there is more agreement on an important aspect of Social Security reform than meets the eye. Broadly speaking, the Democratic proposal to close the financial gap is to increase benefits for people with low lifetime incomes and collect more revenue from people with high incomes. The Republican approach is also to increase benefits for people with low lifetime incomes and provide lower future benefits than is now currently promised for high earners.

My point is that on net over the lifetime, both proposals would have the poor do better and the burden of adjustment borne by people with higher incomes. High earners either get benefits that are now promised-but-not-payable and pay more in taxes than under current law, or pay the same taxes as under current law but receive less in future benefits. The net is the same.

Given the existence of a financing gap, the burden of adjustment must be paid by someone through either higher taxes or lower benefits. In considering who should bear the burden of adjustment, policy makers will look at both distributional concerns within each generation—the rich vs. poor—and issues of generational fairness (today’s workers and retirees vs. those int he future). To see this, imagine the Harkin-Warren proposal in which benefits are not lowered and all reform comes through changes in revenues from higher earners. Waiting for several decades to undertake this reform means that several decades worth of rich people do not share in the burden of the adjustment,, which is borne by the future rich rather than shared with the current rich.

Finally, opponents of reductions in promised benefits sometimes note that such a reform would reduce the link between contributions paid and benefits received and could reduce societal support for Social Security, perhaps by making the program seen as something closer to “welfare” than to social insurance. This concern is a reasonable one, involving a mix of optics (as one commenter put it), politics, and sociology. On the economics, however, looking at reforms from the perspective of the net lifetime approach shows that lowering the promised benefits of high earners and raising their taxes have the same impact and differ mainly on whether money is run into the government from those with relatively high earnings to pay it back out in benefits for retirees who had high lifetime earnings.

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

I think it is incorrect to describe the entire Obama budget released on Tuesday as “dead on arrival.” Yes, the document was full of retread proposals that did not find favor in previous years and are no more likely to be enacted in 2014. Yes, the budget was honed as a political tool for the fall elections — a “campaign brochure” in the words of Representative Paul Ryan, Republican of Wisconsin. And yes, President Obama’s failure to take on entitlement reforms means that he intends to leave his successor to face a horizon with a mounting burden of debt relative to gross domestic product — a reflection of a budget proposal that would stabilize the national debt for only about a decade, even with a panoply of new taxes.

Despite these inadequacies, within the budget are at least three ideas that deserve serious consideration: proposals related to spending on infrastructure like roads and bridges, to job training and to early childhood education. Each of these initiatives involves new spending, but more money would be merited if accompanied by improvements that make better use of existing funds. And new legislation in these three policy areas could address pressing economic challenges in the United States and result in substantial positive returns for both individual families and for the nation as a whole.

At the same time, the specific proposals in the budget are incomplete in a way that is symptomatic of the Obama administration’s maddening inability to shift from political campaign to governance, and that reflects the frustrating reluctance of the president to recognize possibilities for bipartisan compromise. For sure, the latter is no easy task, but there are more than enough Republicans in both houses of Congress — indeed, the vast majority of Republicans — who would much prefer to improve the education of a child than to score a political headline. There is a bipartisan caucus for progress.

As an example, look to the bargain reached in August regarding reforms to student loan funding. Mr. Obama came forward with a proposal similar to legislation that had passed the House, rebuffing efforts by a group of Democratic senators to continue picking a fight, and rapidly ended up with a bill on his desk. The same could be done in these three areas – perhaps not as easily or quickly as with student loans, for which the threat of rising interest rates represented a burning policy fuse. But the possibility is there for infrastructure, training and early childhood education but this opportunity is not taken up in the president’s budget.

On infrastructure spending, all of us can see possible high return projects — witness the state of too many American roads, airports and schools. But there are also ample ways to waste money — a point the administration proved all too well by burning taxpayer funds on the likes of Solyndra and other fruitless ventures. The quality of spending matters, and on this the administration must show that it has learned a lesson and will improve.Read more…

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Social Security is a hot button political issue, but there is actually more agreement on the matter than might meet the eye. Consider a potential Social Security reform that increases benefits for low income retirees and raises taxes on workers with relatively high incomes. This sounds a lot like what Democratic members of Congress might favor.

Now compare this to an alternative that maintains current taxes on the rich but lowers their benefits, while again raising benefits for those with low incomes. In broad strokes, this is the Republican proposal. It turns out that those are the same, once assessed from a perspective that looks at the net of lifetime contributions and benefits. Too bad, though, that President Obama, who once upon a time spoke about making tough decisions to ensure the sustainability of vital entitlement programs such as Social Security, is stepping back from the issue.

The Obama budget released on Tuesday leaves out the President’s previous proposal to modify the formula by which Social Security benefits are adjusted for inflation, a change meant to improve the financial condition of the retirement program. This is even though last year’s budget documents noted that “most economists agree that the chained CPI provides a more accurate measure of the average change in the cost of living than the standard CPI.”

News reports indicated that Mr. Obama is still actually open to the idea in principle. But proposals favored by the president are put in the budget, even if like his various suggestions for higher taxes and more spending, they stand little chance of enactment. Read more…

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Sometimes government programs that seem flawed at their launch turn out to succeed against all expectations. No, this is not a post about the Affordable Care Act — I still think that will prove to be an unsustainable fiscal train wreck. I have in mind the Obama administration’s Financial Stability Plan to continue the bank rescue, kicked off in a speech by Timothy F. Geithner as Treasury secretary just over five years ago, on Feb. 10, 2009.

Mr. Geithner sought to explain how the new administration would carry on with the job of stabilizing still-fragile financial markets. The Bush Treasury, at which I was a senior official, had intervened to support money market funds, banks, General Motors and Chrysler, and the American International Group insurance company (for which TARP money was used to restructure the Federal Reserve’s loan). The Federal Reserve and Federal Deposit Insurance Corporation had taken a range of vital and innovative actions to stanch the crisis, and staff members from the Treasury and Fed were developing a program to address credit market strains that were hindering business and consumer lending.

Even though Mr. Geithner had made key contributions to the financial rescue programs while in charge of the Federal Reserve Bank of New York, it was natural to expect the recently inaugurated President Obama to put his own stamp on the program, especially when many Americans were understandably discomfited at the idea of the bank rescue in the first place. Indeed, the president himself had built up expectations just a few days earlier that his Treasury chief would provide “a new strategy to get credit moving again.”

The Geithner plan aimed to assure investors of bank stability, to cleanse bank balance sheets of remaining illiquid assets such as subprime mortgage-backed securities, and to encourage new lending to businesses and consumers. In broad strokes, this had the makings of an appropriate response to the problems facing the financial system, in large part by continuing and building on the efforts already under way that had succeeded in arresting the panic of September 2008. Read more…

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr. Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant Treasury secretary for economic policy from 2006 to 2009.

News reports in advance of the State of the Union address focused on President Obama’s promise to take unilateral action on his priorities in defiance of Congress, and subsequent reports have stressed the president’s intention to go over Congress’s head.

But while the two of us come from alternative sides of the aisle on much economic policy, we think this story line misses some potential opportunities for bipartisan progress. Such progress is by no means assured even when there is broad agreement on a policy — the details matter for reaching agreement, as does the political messaging (the latter sometimes too much). But even so, we see possibilities to make for a truly stronger union.

Here are some areas raised in the speech upon which we (mostly) agree, and where we wonder if perhaps something useful could come to fruition. Even as we’re old friends trying to model good behavior and play nice, however, there are patches of this common ground where we disagree. We briefly elaborate those as well.

Immigration Reform

We agree that the bipartisan agreement reached in the Senate would be a positive step for the overall economy, for our fiscal situation, and for the millions of undocumented workers and families stuck in the shadows. President Obama struck the right tone in calling for progress but giving the House the political space to move forward. There are signs that the House leadership intends to do so, with legislation in steps, presumably focused on border security first and then on providing undocumented immigrants with some sort of legal status, though perhaps not a path to citizenship. Read more…

The good news for Janet Yellen is that she will take the reins at the Federal Reserve on Saturday with inflationary pressures subdued and the United States economy finally in an upswing (occasional stock market gyrations notwithstanding). Too many Americans remain out of work or have given up looking for a job, but the worst of the financial crisis and recession are past – an accomplishment for which Ben S. Bernanke, the departing chairman, will receive deserved acclaim.

The difficult part for Ms. Yellen is that she faces a new set of challenges involving not just monetary policy but also broader questions regarding the role of the Fed in the nation’s economy and political system.

Most immediately, she will be charged with guiding a monetary tightening — first by completing the Fed’s tapering of purchases of Treasury bonds and mortgage-backed securities, and then by returning to a more usual level of interest rates after five years in which the overnight rate set by the Fed has been virtually zero. Ms. Yellen has associated herself with the view of Mr. Bernanke that the pace of monetary normalization depends on the data, but this still leaves the difficult question of knowing when the labor market is nearing a level of full employment at which inflation would become more of a concern.

If a strong enough economy can bring people off the sidelines and back into the labor force, then there is more slack in the labor market than implied by the recent decline in the unemployment rate. In this case, the Fed could maintain easy monetary conditions in an attempt to drive up wages and the participation rate. The benefits of the third round of quantitative easing, the so-called QE3, have shown up most prominently in driving up asset prices like stock values. While the move is intended to strengthen the broad economy, the immediate gains thus appear to have been skewed toward wealthier households. One could imagine that the new Fed chief, the first Democrat in the position in decades, might view monetary policy as a way to produce higher wages, and thereby direct more of the benefits of Fed actions to a broader group of Americans. Read more…

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Melvin L. Watt was sworn in on Monday as director of the Federal Housing Finance Agency, leaving Congress after a distinguished two-decade career as a Democratic member of the House of Representatives from North Carolina. As the federal regulator for Fannie Mae and Freddie Mac, Mr. Watt effectively controls the two companies and thus has considerable sway over the housing market — and, as a result, faces enormous expectations from people who cheered the 2013 change in the Senate rules that made possible his confirmation.

These advocates are looking to Mr. Watt to direct the two government-controlled firms to make mortgages more broadly available to families with imperfect credit, to write down loan balances for underwater borrowers (those who owe more than their homes are worth), and to refinance still others into low-interest rate loans. These actions would mean increased risks and lower income for Fannie and Freddie, and thus for taxpayers, who own 79.9 percent of the two companies and have an additional $188 billion stake in the form of preferred shares. In other words, housing advocates are looking for Mr. Watt to have the companies effectively undertake government spending using his regulatory authority rather than doing so through a vote of Congress.

Mr. Watt replaced Edward J. DeMarco, a career civil servant who had served as acting director since 2009. Mr. DeMarco had come under withering criticism from the Obama administration and its political allies for refusing to take these steps to the extent desired by the president. Mr. DeMarco, for example, allowed Fannie and Freddie to refinance borrowers whose mortgages the two companies already guaranteed even if the homeowner in question was riskier than would have been allowed under normal underwriting guidelines. After all, Mr. DeMarco reasoned, the companies’ guarantee meant that they (and thus taxpayers) were already at risk. Read more…

Japan’s central bank, the Bank of Japan, is finally taking the action long suggested by outside economists as a remedy for two decades of stagnation: a prolonged period of substantial monetary expansion to end deflation and reverse the drag on business and consumer spending induced by deeply embedded deflationary expectations. Under the leadership of its governor, Haruhiko Kuroda, the bank increased its purchases of Japanese government bonds in April, with a stated aim of lifting inflation to 2 percent.

There are signs of initial success, as core inflation (consumer prices without volatile food and energy components) rose in November to 0.6 percent over the past year — still low, but the largest gain in 15 years. The idea is that sustained price gains will eventually feed through into higher wages, then into stronger spending by consumers who no longer wait for prices to fall, and ultimately into more vigorous investment and hiring by Japanese businesses.

Among those suggesting to the Bank of Japan that monetary policy could reverse deflation if applied in a consistent and determined fashion was the Federal Reserve chairman, Ben S. Bernanke, who as a Princeton professor in 1999 wrote that the reasoning the Japanese central bank provided for not acting was “confused” and “inconsistent,” among other criticisms.

Mr. Bernanke gave a more polite version of his advice in 2003 while serving as a Fed governor (again, before he became chairman), noting that a healthy Japanese economy would contribute to “a stronger, more balanced and more durable” global recovery and urging the bank to be open to “fresh ideas and approaches,” such as more active monetary policy to reverse deflation.

The criticism is understated but striking, since students in Econ 101 learn early on that creating money with the electronic equivalent of the printing press, and handing it to the government to spend, will eventually lead to higher prices (though it could take a long time, as we have seen in the United States). Yet the Bank of Japan dug in with its opposition while outsiders urged action — perhaps, as Paul Krugman hypothesized, because the bank feared that it would not succeed and then lose face. Read more…

Reading the lengthy background paper that accompanied Tuesday’s release of the Volcker Rule, it is striking the extent to which the five federal regulatory agencies involved sought to implement the law faithfully (as they put it) by prohibiting proprietary trading by banks while avoiding the worst potential negative impacts on financial markets.

President Obama explained that the idea was to have “a rule that makes sure big banks can’t make risky bets with their customers’ deposits” — the concern being that taxpayers guarantee most bank deposits. In reality, banks take risks with customer deposits every day, since their lending to families and businesses are funded with deposits, among other sources. This credit is vital to the economy, but involves risk: witness the multitude of banks that failed during the crisis because of losses from poor real estate loans.

Following the suggestion of Mr. Volcker, Congress in the Dodd-Frank financial regulatory reform legislation viewed proprietary trading and hedge fund investments as particularly risky and therefore to be kept mostly apart from banks that rely on taxpayer guarantees.

Last year’s London Whale trading episode illustrates that banks indeed can lose prodigious amounts of money when trades go wrong. But just as the Whale did not nearly threaten to sink JPMorgan Chase, neither did proprietary trading appear to have been an especially important factor behind the recent financial crisis. Moreover, the large banks with the most active proprietary trading desks mostly rely on funding sources other than insured deposits. Trading is an important activity at Goldman Sachs, for example, but relatively little of the firm’s funding is insured by the federal government. There is a sense, then, in which the Volcker Rule is a solution in search of a problem. Still, it is the law. Read more…

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